What to Expect from the 2024-2025 Budget

On July 23, the Union Budget for the financial year 2024-25 will be presented. This budget will shape India's economic landscape for the coming year, affecting everything from infrastructure development to social welfare programs. Let's break down what we might expect and what these terms mean in simple language.

What is a Balanced Budget?

A balanced budget aims to find the middle ground between two different types of spending:

Growth-Oriented Spending:

This involves investing in big projects like roads, bridges, and schools which help the economy grow in the long run.

Populist Spending:

This involves spending money on programs that provide immediate relief to the general public, such as subsidies or direct cash transfers.

A balanced budget tries to boost both consumption (spending by people) and capital expenditure (long-term investments) while keeping an eye on overall government spending and debt.

Focus Areas: Rural Spending and Agriculture

Helping Farmers and the Rural Economy

The government often allocates a significant portion of the budget to rural areas and agriculture. Here’s why this is important:

Minimum Support Price (MSP):

This is a guaranteed price set by the government to purchase crops from farmers. While MSP helps farmers, there are challenges in its implementation.

Better Financing for Agriculture:

Farmers need better access to loans and financial services to improve their productivity. This includes everything from planting to selling their produce.

Rural Consumption Growth:

The spending power in rural areas is growing faster than in cities. This is an opportunity to boost the rural economy further.

Technology and Skills:

As rural areas become less dependent on farming, there’s a need to improve skills and access to technology for other types of work.

Sticking to Fiscal Discipline

Fiscal Consolidation Explained

Fiscal consolidation means the government aims to reduce its budget deficit (the gap between what it spends and what it earns). This involves careful planning to ensure that spending doesn’t exceed income. Here’s how this could be managed:

Non-Tax Revenue:

This includes money the government earns from sources other than taxes, like dividends from public sector enterprises.

Maintaining a Deficit Target:

The goal is to keep the fiscal deficit within a certain limit. For FY2025, the target might be around 5.1% of the GDP.

Conclusion:

The Impact of Budget Spending

Government spending has different impacts on the economy:

Revenue Expenditure:

This includes day-to-day spending like salaries, subsidies, and welfare programs. It has a smaller impact on economic growth (for every `1 spent, GDP grows by `0.99).

Infrastructure Spending:

Investing in infrastructure like roads and bridges has a bigger impact on economic growth (for every `1 spent, GDP grows by `2.5 to `3.5).

A balanced budget should therefore aim to improve infrastructure while also addressing immediate social needs.

What to Expect: Will Things Become Costlier or Cheaper?

The Union Budget can have a significant impact on the prices of everyday items and services. Here's a simple breakdown:

Items That Might Become Costlier

Imported Goods:

If the government increases import duties, products like electronics, cars, and luxury items could become more expensive.

Sin Goods:

Items such as cigarettes, alcohol, and sugary drinks might see price hikes if the government raises taxes on these products to discourage their use.

Items That Might Become Cheaper

Essential Goods:

The government might reduce taxes on essential items like food grains, medicines, and daily necessities to make them more affordable.

Home Appliances: Sometimes, to boost manufacturing, the government reduces taxes on raw materials for making things like refrigerators, washing machines, and air conditioners, which can lower their prices.

Benefits for the Common Man

The budget often includes measures aimed at helping ordinary citizens. Here are some potential benefits:

Tax Relief

Income Tax:

The government might raise the income tax exemption limit, meaning you pay less tax on your earnings.

Standard Deduction:

This is a fixed amount that can be deducted from your taxable income, reducing your tax bill.

Subsidies and Welfare Programs

Food and Fuel Subsidies:

The government might increase subsidies, making food and cooking gas cheaper.

Health and Education:

Increased funding for health and education can mean better facilities and services for everyone.

Employment Opportunities

Skill Development Programs:

More funding for skill development can help people get better jobs.

Infrastructure Projects: Investment in big projects creates jobs and boosts local economies.

Impact on the SENSEX

The SENSEX is a stock market index that shows how the stock prices of 30 large companies in India are performing. Here's how the budget might affect it:

Before the Budget

Market Speculation:

Investors often buy or sell stocks based on what they think the budget will include. This can lead to fluctuations in the SENSEX.

Expectations:

Positive expectations (like tax cuts or increased spending) can drive the market up, while negative expectations (like higher taxes) can pull it down.

After the Budget

Immediate Reaction: Once the budget is announced, the market reacts to the actual measures. If the budget is seen as favourable, the SENSEX might rise. If not, it could fall.

Long-Term Impact: The real effects of the budget on the economy and specific sectors (like agriculture, manufacturing, or technology) will influence the SENSEX over time.

Conclusion

The Union Budget for 2024-2025 will play a crucial role in shaping India's economic future. While some items might become costlier or cheaper, the common man can expect potential benefits like tax relief and better access to subsidies and welfare programs. Additionally, the SENSEX will likely experience fluctuations both before and after the budget announcement as investors react to the proposed measures.

By understanding these potential changes and impacts, we can better prepare for the financial year ahead. Stay tuned for more updates and detailed analyses as the budget date approaches.

What Should a Common Man Mutual Fund Investor Do?

If you're investing in mutual funds, the Union Budget can create some uncertainties and questions about what you should do next. Here’s a simple guide to help you navigate through these times:

Continue SIP (Systematic Investment Plan)

What is SIP? SIP is a way of investing a fixed amount in mutual funds at regular intervals, like monthly.

Why Continue? SIPs help you invest regularly, regardless of market conditions. By continuing your SIPs, you can benefit from rupee cost averaging, which means you buy more units when prices are low and fewer when prices are high, averaging out the cost over time.

Maintain a Balanced Portfolio and Rebalance

Balanced Portfolio: This means having a mix of different types of investments like stocks, bonds, and other assets.

Rebalance:

Rebalancing is adjusting your portfolio to maintain your desired level of risk. For example, if stocks have done well and now make up a bigger portion of your portfolio than you intended, you might sell some stocks and buy more bonds.

Why It Matters: Keeping a balanced portfolio helps manage risk and ensures that you don’t have too much invested in any one type of asset.

Follow a Financial Plan

Guided Asset Allocation: This means having a strategy for how much to invest in different asset classes (like stocks, bonds, and cash) based on your financial goals, risk tolerance, and time horizon.

Withdraw or Redeem as Per Set Goals: Stick to your financial plan and only withdraw or redeem your investments when you reach your set goals. Don’t make impulsive decisions based on short-term market fluctuations or budget announcements.

Get Personalized Advice from a CERTIFIED FINANCIAL PLANNER

Why Seek Advice?

A CERTIFIED FINANCIAL PLANNER can help you understand how the budget might impact your investments and financial goals. They can provide personalized advice tailored to your situation.

Benefit:

Professional guidance ensures that your investment strategy is aligned with your long-term financial objectives and helps you make informed decisions.

Conclusion

The Union Budget can bring changes and uncertainties, but by continuing your SIPs, maintaining a balanced portfolio, following a financial plan, and seeking personalized advice from a CERTIFIED FINANCIAL PLANNER, you can navigate through these times confidently. Stick to your long-term goals and avoid making hasty decisions based on short-term market reactions.

Sources

The information for this summary is drawn from various credible sources including the Ministry of Finance, India Budget documents, KIE, SBI Research, and NIPFP.

 Taresh Bhatia is author of The Richness Principles, a CERTIFIED FINANCIAL PLANNER (CFP)

 Disclaimer:

The information provided in this article is for general informational purposes only and should not be considered as financial advice. Always consult with a qualified financial advisor before making any investment decisions.